* France can ill afford tax breaks as it reduces deficit
* PM unable to put a figure on the cost of tax relief
* New housing starts weakest since 1998, weighing on growth (Recasts with details, adds quotes from Prime minister)
By Leigh Thomas
PARIS, Aug 29 (Reuters) - The French government offered tax breaks to property owners on Friday in its second set of measures in three months to reverse a homebuilding slump that is holding back growth in the euro zone’s second-biggest economy.
Braving steady criticism from the left that he is too pro-business, Prime Minister Manuel Valls said the government would also limit plans for rent caps, which builders and property developers say has scared off investors.
Promises in June to slash red tape on home-builders and ease conditions for interest-free loans have done little to reassure a sector which is a big employer, and which has been battered by policy switches and uncertainties since President Francois Hollande took power in 2012.
With house construction still in decline, the Socialist government has little choice but to increase tax breaks to tackle a chronic housing shortage, even though it can ill afford them as it struggles to rein in its public deficit.
“When we have a situation like this with a climate of mistrust, we have to restore trust with decisions that are neither political nor ideological but pragmatic and effective to favour investment and renovations,” Prime Minister Manuel Valls told journalists.
Unveiling the latest package to revive the sector, Valls said that the government would revise the capital gains tax regime on property to prod land owners to sell for construction.
He also said that land owners who sell property before the end of next year would benefit from an exceptional 30 percent tax break on capital gains.
To boost the rental market, Valls said landlords would get bigger tax breaks if they offered leases of at least six years compared to nine currently.
Poor households would also pay a specially reduced sales tax rate of 5.5 percent on newly built houses in areas deemed to be a priority rather than the standard 20 percent.
Valls also said that rent caps planned for tight markets would only be tried on an experimental basis in Paris, largely eviscerating a fiercely criticised housing law enacted in March of one of its main bones of contention.
Valls was unable to put a cost on the tax breaks when asked but assured that it would not drive the government’s current budget strategy off track.
Much to the concern of builders like Bouygues and developers like Kaufman and Broad, year-on-year new home sales fell by 15 percent in the second quarter, according to the FPI property developers association.
With housing starts at their weakest level since 1998, the sector’s slump is also choking economic growth, which stagnated in both the first and second quarters in part because of collapsing household investment in new homes.
Developers and builders say the situation has been worsened by the March law, vastly increasing paperwork during home sales and requiring rent limits in some cities.
Facing a hail of criticism, the government in June was forced to drop a campaign pledge it would build 500,000 new homes a year, adding to a litany of broken promises that has made President Francois Hollande the least popular president in modern French history.
At the same time it pledged to would cut regulations holding back construction and revive interest-free loan schemes for would-be homebuyers.
“A climate of confidence needs to be rebuilt for investors,” Bouygues chief executive Martin Bouygues, told journalists on Thursday.
“One of the big problems we have in France is that we have to live with ... tax, legal and social insecurity as each government is constantly changing the rules,” he added.
Housing investment graphic: link.reuters.com/jah69v
French house prices: link.reuters.com/tyx36t
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Leigh Thomas; additional reporting by Gergory Blachier and Natalie Huet; Editing by Geert De Clercq and Toby Chopra)